Your small business can use gross profits to measure what kind of return you are getting on sales and marketing. Calculating gross profits in relation to sales figures and marketing costs gives you a picture of how effective your company is at maintaining a healthy profit margin.

Calculating Gross Profits

Your gross profits figure is the total of your sales minus the cost of goods sold and your marketing expenses. Cost of goods includes only the actual prices paid for inventory, not interest, overhead, taxes or any other expenses the company may incur. Your marketing expenses include print and broadcast advertising, designing and printing of print materials, website development, trade shows and publicity. You want a gross figure, not a net figure. Subtract your cost of goods and marketing from your revenues.

Calculating Gross Profit Margin

Your gross profit figure can be turned into a percentage. Use this calculation: Divide sales minus cost of goods sold and marketing expense by sales and multiply by 100. Example: If you had a sales of $100,000, spent $20,000 on marketing and $15,000 on cost of goods, do this calculation: 100,000 - 20,000 -15,000 / 100,000 = .65 Multiply by 100 to get the percentage: 65 percent. Your gross profit margin is 65 percent.

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Using Gross Profit Margin to Evaluate Return on Sales and Marketing

Once you know your gross profit margin, which has been calculated using your sales value minus marketing expenses and cost of goods sold, you know what percentage of revenues you have to pay expenses. You can allocate funds to capital expenditures, recurring expenses, debt, taxes and new inventory. Your gross profit margin is what allows the company to function. The higher the percentage, the more you can grow. The lower the percentage, the closer you are to a negative cash flow.

If You Use Debt to Drive Sales

Since gross profits do not include debt service, you should pay particular attention to whether you are achieving sales by borrowing to pay for advertising and marketing expenses. You should pay as much of these expenses as possible out of gross profits, rather than debt. Otherwise, your debt will rise as your sales rise.

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About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.